Oil Prices Have Allies in Pummeling Share Prices --
Part II

THE OPENING SALVOS OF EARNINGS SEASON prompted several ad hoc meetings of the Falling Knife Catchers Club, made up of investors who try to find plummeting stocks worth grabbing, without losing too many fingers.

Netflix -- an object of Barron's skepticism at various times on its way from its $15 initial offering price to its high near 40 -- lost a third of its value to about 10 following its profit report and an alarming forecast for the coming year. (See Follow Up).

Less dramatically,
Novellus
shares dropped nearly 10% on a saggy business outlook, showing that there is still room for disappointment in the beaten-up semiconductor-equipment sector.

Away from the earnings slate, of course, sits the smoldering pile of rubble that is the insurance-brokerage and property-casualty group. Eliot Spitzer's stark charges of bid-rigging at Marsh & McLellan and
AIG
have led these stocks to be disgorged in disgust. (For more on the insurance stocks, see Risk Assessment.)

One earnings offender that's a bit cooler to the touch and may recover the market's high regard more readily is
Accenture.
The big technology-consulting and outsourcing company, formerly known as Andersen Consulting, reported decent earnings with the help of a lower tax rate but tempered its projected profit growth for fiscal 2005, which just started Sept. 1.

Accenture's new CEO, William Green, penciled in 9% to 12% growth in earnings per share, down from 10% to 15%. That suggests $1.34 to $1.39, up from the just-reported $1.24. New contract bookings are projected at $18 billion to $20 billion, implying flat-to-down performance, thanks in part to slowing outsourcing growth.

Investors griped that the latest quarter's bottom line was lightened by an added $125 million in incentive compensation -- which some took to mean that the former partnership is enriching employees at the expense of shareholders.

The stock was tagged for a 12% loss to around 23.50, which qualifies as a harsh punishment for one of the steady segments of the tech galaxy. The shares are now a touch lower than they were in late July, when Barron's Online profiled the company favorably.

The positive result of the sour market response is that it has lowered expectations for a name that still enjoys excellent financial trends and now appears more than reasonably priced. Accenture's outlook now incorporates no acceleration in new business, and profit-margin expectations have been eased as well.

Although the outsourcing business has softened, the decline in that business lately seems the result of
AT&T's
move to exit the consumer long-distance game, says Legg Mason analyst William Loomis.

The consulting business -- which pays quicker returns in revenue and profits -- appears solid, with bookings up more than 20% last quarter and retaining some momentum.

At root, Accenture is a story of recurring revenue and free cash flow. The newly tempered guidance suggests the company will generate more than $1.5 billion in free cash flow in the current fiscal year. Accenture has a $23 billion market capitalization and no debt, making for a "free cash flow yield" of 6.5%.

The company also has $3 billion in cash on hand, so the operating company is effectively capitalized at about $20 billion, making the valuation look that much better. Accenture announced a $3-billion share buyback last week, giving shareholders some direct benefit from its strong financial position.

Accenture's price-earnings ratio of 17 on lowered fiscal 2005 forecasts represents a meaningful discount to the IT-consulting sector average above 23. Stripping out the cash, Accenture's business carries a P/E below 15.

The caveat to this reassuring take on Accenture is that Wall Street analysts continue to like the stock a bit too much, with a whopping 24 Buy ratings, three Holds and no one recommending it be sold.

On the buy side, too, it seems that plenty of money managers were "hiding" in Accenture shares as a cautious way of participating in technology.

The question is whether last week's 12% drubbing sufficiently drained the excess optimism from the market -- whether, in fact, this knife has yet landed. If not, the numbers make it appear rather close to that point.

IN ADDITION TO FALLING KNIVES to catch, the market offers at least a few rockets to chase.

Apple Computer is one of the most hotly pursued lately. Subjected to a cautious evaluation here last week, it was noted that Apple would need to handily beat profit expectations to keep the stock aloft.

The company beat the numbers running away, with sales of its iPod music players coming in more than 25% ahead of forecasts, and earnings of 26 cents a share versus 18 cents expected. The stock took off anew, rising from 39 to above 45 in a blink.

Never mind what still appears to be an aggressive valuation. The stock will now trade as a consumer-product momentum story, with all eyes on holiday-season iPod and iMac computer sales trends. The iPod, say tastemakers, is the hot item on bid lists to Santa this year. For now, Apple's head start over
Dell
and others has protected it from competition in the music devices.

Fans of the stock point out that there is enormous profit-margin leverage in surging iPod sales. Others note that growth-fund investors are just now discovering the story.

The open question remains whether Apple's market share is vulnerable here. A bigger untested assertion -- that the iPod will generate a meaningful pickup in iMac sales -- looms. The responses will determine how much fuel is left in a stock that has smoked its doubters until now.

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